A Huge Change in 2nd Home Financing

Fannie Mae and Freddie Mac announced a tectonic change in their strict guidelines of rental income received on your 2nd home.

Receiving rental income on your 2nd home has always been a confusing issue for consumers. The old rules that seemed quite clear were always misinterpreted. The requirement was that you spend at least 2 weeks a year (14 days) at your 2nd home. Most people ignored the second requirement that stated for the remaining time you could not rent the place to others.

The thought process behind the restriction to rent your 2nd home out was very understandable. A 2nd home is for your family’s exclusive use. It is considered an extension of where you live – be it only for a small portion of the year. That is why 2nd home interest rates are the same as those of owner-occupied properties. Under the old rules, if you wanted to rent out the property when you weren’t there, it was considered an investment property you stayed at occasionally.

Now the new rule that is effective immediately allows the owner of a 2nd home to rent out their property for short-term vacation rental purposes.

Here is the fine print: You cannot rent the property out for long-term rentals. The property must be available primarily for the use of the owner. Fannie and Freddie’s definition of the property being available primarily for the use of the owner is that you cannot rent out the unit for more than 6 months of the year.

It should be noted and made very clear that if you are reporting income on your 2nd home, that income still cannot be used for income qualification. If rental income is needed to qualify for the loan, you will need to obtain an investor loan, not one for a 2nd home.

Over the course of my 20-plus years in this business, I have financed hundreds of 2nd homes. I know many of these decent and honorable people are, despite the 2nd home rider to their mortgage that they signed, are renting their place out – thus violating the 2nd home provisions of their mortgage. These people have also been forced to “hide in the shadows” and not been able to refinance when rates dropped because they reported that income on their tax returns. They now have the opportunity to come forward without penalty refinance.

One note of caution: Check your tax returns on Schedule E. For the property you claimed as your 2nd home, but rented out, look to see if you or your tax professional entered the number of “Fair Rental Days” and “Personal Use Days”. Remember from the new rule above, you have to have at least 6 months of personal days. If you or your accountant entered 365 as the “Fair Rental Days” you will have an issue. The good thing a lot of you have not finalized your 2018 tax returns yet!